ECON 1BB3 Lecture Notes - Marginal Product, Production Function, Human Capital Flight

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Economics January 29th, 2013 Lecture Notes
Productivity: The quantity of goods and services that a worker can produce for
each hour of work.
Determinants of Productivity:
1. Physical Capital
2. Human Capital
3. Natural Resources (renewable, non-renewable)
4. Technological Knowledge
Production Function: Shows how we combine inputs to produce output
Equation: Y = A * F (K, L, H, N)
Y = Output
A = Technology
K = Physical Capital
L = Labour
H = Human Capital
N = Natural Resources
If a production function exhibits constant returns to scale, then doubling all inputs
leads to a doubling of output.
Examples:
1. 2Y = A * F(2K, 2L, 2H, 2N)
2. 100Y = A * F(100K, 100L, 100H, 100N)
3. xY = A * F(xK, xL, xH, xN)
4. (Y/L) = A * F(K/L, 1, H/L, N/L)
Diminishing Marginal Product
Product: Output
Marginal product: The extra output produced by increasing an input by 1 unit
Diminishing Marginal Product: The extra output produced by adding the 19th unit
of labour is smaller than the extra output produced by adding the 18th unit of labour.
Catch-up Effect
Catch-up effect: Poor countries tend to grow faster than rich countries
<SEE DRAWN ATTACHED GRAPH>
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Document Summary

Productivity: the quantity of goods and services that a worker can produce for each hour of work. Determinants of productivity: physical capital, human capital, natural resources (renewable, non-renewable, technological knowledge. Production function: shows how we combine inputs to produce output. Equation: y = a * f (k, l, h, n) If a production function exhibits constant returns to scale, then doubling all inputs leads to a doubling of output. Examples: 2y = a * f(2k, 2l, 2h, 2n, 100y = a * f(100k, 100l, 100h, 100n, xy = a * f(xk, xl, xh, xn, (y/l) = a * f(k/l, 1, h/l, n/l) Marginal product: the extra output produced by increasing an input by 1 unit. Diminishing marginal product: the extra output produced by adding the 19th unit of labour is smaller than the extra output produced by adding the 18th unit of labour. Catch-up effect: poor countries tend to grow faster than rich countries.

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